Cost to Insure Treasurys Over One Year Falls 9%

A sign closing the entrance is posted outside the Treasury Department in Washington.

Associated Press

Signs of a thawing in the U.S budget battle lowered the cost to insure U.S. Treasurys against default for a year.

One-year protection sold via credit-default swaps was quoted at about 68,000 euros a year to insure 10 million euros of U.S. Treasurys against default, said data provider Markit, down 9% from 75,000 euros at one point Wednesday.

The price of CDS on U.S. debt is costlier over one year than five because investors foresee a greater risk, however unlikely, that the U.S. government could miss a payment on its debt over the shorter term.

Costs of five-year CDS protection on U.S. Treasurys also fell slightly to sit at 35,000 euros a year, Markit data show, down from 40,000 euros.

Default protection on U.S. Treasurys is quoted in euros, just as European sovereign CDS contracts are quoted in dollars, sparing investors the risk the hedge will fall in value at the same time as the currency itself.

The debt-ceiling talks have pushed the net outstanding volume of CDS on U.S. debt to $3.6 billion from $3.4 billion a week, according to Depository Trust & Clearing Corp.

CDS function like an insurance contract against nonpayment on debt. If a borrower fails to meet its obligations, credit swaps pay the buyer face value, less the value of the defaulted debt.

For the U.S., that is currently a Treasury bond due in August 2042 that trades at 82 cents on the dollar, yielding U.S. CDS holders a hypothetical 18-cent payout.

The Treasury Department has said that by Oct. 17, it would have only $30 billion left to pay bills.